Weekly economic briefing: The RBA’s consumer conundrum

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

The RBA’s consumer conundrum

Last week’s release of the National Accounts by the Australian Bureau of Statistics (ABS) followed the Reserve Bank of Australia’s (RBA) June monetary policy meeting which saw rates left on hold at the historic low rate of 1.5% for the 20th consecutive meeting.

According to the ABS data, and in seasonally adjusted terms, the Australian economy grew by 1.0% over the March quarter of 2018, or 3.1% over the year. This result was above most estimates for trend growth of around 2.75% which, if sustained, should help lower the rate of unemployment over time.

The key driver of growth over the year was consumer spending, with business investment and the government also strong contributors. Households were responsible for a little over 50% of the total growth, but at nearly 60% of the total economy, this was a less than proportionate contribution.

Chart: Percentage point contribution to economic growth, year to March 2018

Source: ABS Cat No. 5206

On the flip side, after lifting over recent years, spending on new dwellings is no longer a growth driver. Net exports also failed to contribute to economic growth over the past year, with global commodity prices levelling out.

As noted above, interest rates remained on hold last week. When describing the state of the economy, the RBA noted that “one continuing source of uncertainty is the outlook for household consumption.”1

The outlook for consumer spending is affected by a number of offsetting factors. On the positive side, employment growth has been particularly strong over the past year, which has contributed to growth in household incomes. The large increase in asset prices (particularly house prices) since 2012 has also been a positive. This ‘wealth effect’ has made households more comfortable with saving less. At 2.1%, the household savings rate is now back at pre-global financial crisis (GFC) levels. These two factors have kept consumer spending growth ticking on.

However, questions remain as to how long this will continue. The housing cycle in the key Sydney and Melbourne markets has turned, with prices on average falling in Sydney in recent months. Slower growth in household wealth, coupled with the large amount of debt owed by Australian households may lead to more cautious behaviour in the future (particularly when interest rates do return to more normal levels – as they inevitably will).

More important perhaps is the outlook for wage growth. While employment growth has surprised on the upside, on most measures wage growth is still dormant. For example, growth in the wage price index was just 2.1% over the last 12 months, well below the average of 2.9% over the past decade.

A prolonged pick-up in wage growth will be needed to maintain consumer spending growth, and with it, the above trend rate of economic growth needed to lower unemployment. All of that is allowing the RBA to keep the cash rate at its current historic low.

UK economic briefing by Ian Stewart

I don’t recall a time when there has been so much interest and anxiety about the effects of new technology on jobs. Last week I took part in a panel discussion at the House of Commons on the future of work. These are the ideas I tried to convey.

Technology shapes work and drives human welfare, but so, too, do organisational innovations unrelated to technology. Specialisation in production, first articulated by the eighteenth century economist, Adam Smith, transformed production, but had nothing to do with technology. The era of low cost, mass air travel was ushered in, in the 1980s, by deregulation, not technology. The world of work is shaped by new ideas, some of them related to technology, many not.

Technology and new ideas have been destroying, and creating jobs, for centuries. Each generation is awed by the great inventions of the age. Many have believed they are on the verge of a new, uniquely destructive wave of job destruction. The chances are that today’s job jeremiahs will be as wrong as earlier ones.

Technology is not the main destroyer of jobs. More prosaic forces – recessions, competition, consolidation, bad decisions, changes in consumer preferences and the many other vagaries of a market economy – wipe out far more jobs.

Routine, less well-paid work, has been and remains most susceptible to automation.

The destruction brought about by technology tends to be direct and obvious. Machines have, for instance, replaced people on a vast scale in agriculture and manufacturing. Manufacturing accounts for just 8% of all jobs in the UK, down from about 40% at the end of the last war. In the UK and throughout the rich world, the legacy of such economic change can be seen in empty factories and higher jobless rates. The conspicuous and geographically focussed effects of machines on jobs in sectors like manufacturing has tended to fuel a pessimistic view about the effect of technology on jobs.

Less obvious are the channels through which technology creates more and better jobs. Some of them come in the new sectors themselves, such as today’s app designers and software engineers.

But the big job gains come as a result of the way in which technology improves productivity. Technology makes people more productive and useful – and increases demand for their services. And by reducing prices for consumers, productivity growth frees up spending power. Thus, spending on, and jobs in the leisure sector have surged because the real cost of staples such as clothing and food have fallen over time.

The fear is that the next generation of technologies, such as artificial intelligence, will prove so capable that they will supplant humans in even creative and cognitive work. This concern is, itself, age old (for artificial intelligence read ‘computer’ in the last 50 years or ‘machine’ at any time in the nineteenth century).

Humans have an insatiable appetite for ‘more and better’. We are buying more clothes, drinking more overpriced coffees and having more therapy and gym sessions than our grandparents could have imagined. But even in the rich world few would say they have run out of things to spend money on. There are infinite outlets for idle resources: more and better health and social care, new infrastructure, scientific research, housing, the list is endless. The basic economic problem – of finite resources and infinite desires – is not solved by technology. To believe that you need to believe that machines will be able to meet all our needs today and forever.

The nature of jobs changes over time. The 1871 census of England and Wales, the first to ask about occupations, included many roles, such as nurse or accountant, which are recognisable to us. The nature of those jobs have changed completely. The computer freed accountants from their age-old role of recording data and computation, making them more productive and enabling them to take on a wider range of tasks. Anyone who, in 1871, was able to foresee the spreadsheet or the calculator would probably have thought that accountants were heading for extinction. Today there are around 20 times as many accountants working in England and Wales than in 1871. Assuming that the characteristics of work are static over time is one of the reasons we tend to overdo the pessimism about tech and jobs.

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OUR REVIEW OF LAST WEEK’S NEWS

The FTSE 100 ended the week down 0.3% at 7,681.

International economic briefing by Ian Stewart

Economics and business

Euro area GDP grew 0.4% in Q1, the weakest pace since mid-2016

The UK PMIs for the service, manufacturing and construction sectors suggest a modest bounce in UK activity and growth of 0.3 to 0.4% in Q2

The EU targeted €2.8bn of US products with tariffs in retaliation for the US duties on EU steel and aluminium

Mexico imposed tariffs on a range of US products, raising fresh doubts over the prospect of a new NAFTA agreement between the two countries and Canada

China said it will boost imports of US agricultural and energy products by $25 billion, significantly less than the US demand of $200bn over two years

Global foreign direct investment fell by 23% in 2017 as a result of rising trade tensions, according to UNCTAD

The Reserve Bank of India increased its benchmark interest rate for the first time in more than four years over growing inflationary pressures

Estonia will introduce free public transport across the whole country from the start of July

US job openings hit a record high in April

UK starting salaries rose at their fastest rate in three years during May, according to the Recruitment and Employment Confederation

Sales of plug-in hybrid cars in the UK soared by nearly 75% year on year in May, whilst sales of diesel cars fell by 25% over the same period

Strong demand, speculation and bad harvests have driven the price of vanilla from $20/kg five years ago to more than $600/kg, making it as expensive as silver

A new French law will make it illegal for school students to use mobile phones anywhere on school premises

Knights will be the fifth law firm to float on the London Stock Exchange in a further move against the sector’s historic partnership model

Senior euro area policymakers hinted that the European Central Bank’s stimulative asset purchases might be coming to an end

The UK government sold its £2.6bn stake in the Royal Bank of Scotland at a loss to the UK taxpayer

Brexit and European politics

The UK government proposed “a temporary customs arrangement between the UK and the EU” to avoid a hard Irish border after Brexit

The UK government said the arrangement should be “time limited” with new arrangements in place “by the end of December 2021”

The EU said it will not ask third country partners to extend existing trade deals to the UK until the Withdrawal Agreement is formally concluded

The FT reports that the UK could remain in the EU VAT area after Brexit

The logistics industry said it’s “too late” to avoid serious disruption when the UK leaves the EU next March

The European Commission warned EU businesses over their use of UK products post-Brexit and advised car manufacturers to look elsewhere for parts

Northern Ireland’s (NI) Democratic Unionist Party warned it would withdraw its support for the Conservative government if the final Brexit arrangement treats NI differently to the rest of the UK

The UK government rejected the idea that NI could have joint UK and EU status after Brexit

David Rumbens is a Partner within Deloitte Access Economics. He is a macroeconomist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labour market analysis.

Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at M...

Ben a manager in the macroeconomic policy and forecasting group within Deloitte Access Economics. Ben is an expert in Budget policy and is a key author of Deloitte Access Economics’ Budget Monitor publication. Ben also has experience advising public and private sector clients across macroeconomi...

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